Work's for Squares

By

Gene Epstein

Aug. 30, 2014 2:06 a.m. ET

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The job market has made a comeback over the past year, but the American labor force hasn't, and the prospects don't look good. Work seems to be on the wane in the U.S., with worrisome consequences for economic growth.

While the unemployment rate slipped to 6.1% in June -- its lowest level in six years -- the percentage of adult American workers who are actually in the workforce is at its lowest level in 36 years, with no rebound in sight.

No one in government is facing up to the severity of the problem. In her recent talk at the Jackson Hole Economic Policy Symposium, Federal Reserve Chair Janet Yellen posed the question of whether weak labor-force participation is due to cyclical factors that will pass with a stronger expansion or to structural factors likely to endure. She offered no sure answer.

Illo: Scott Pollack for Barron's

Barron's will answer that question for her. The problem increasingly appears to be structural. Following the devastating recession of 2008-09, the "jobless recovery" drove many workers out of the labor force, as often happens when the economy is in a downward cycle and then struggles to recover. But now that the expansion is starting its sixth year, the rebound in the job market is beginning to make the decline in participation look anomalous and therefore likely to persist.

The share of the adult population, 16 and over, participating in the labor force is at its lowest level since 1978, at 62.8% and 62.9% in June and July, respectively. In a comprehensive study of trends in the workforce released in December, the Bureau of Labor Statistics said it expects a further decline in labor-force participation, to 61.6%, by 2022.

The BLS study provides an indispensable framework, essentially asking whether the retiring baby boomers will be replaced in sufficient numbers by younger cohorts. The agency's conclusion is not reassuring.

Indeed, a closer look suggests that the problem is far worse than the BLS supposes. There are two key reasons. For starters, the study makes no mention of the surge in disability filings that has already claimed millions of dropouts from the labor force and will likely claim more. It also makes no mention of the Affordable Care Act's likely negative effects on incentives to work. The Congressional Budget Office projects that the ACA could reduce the labor force by the equivalent of more than two million full-time workers.

Furthermore, the BLS study projected that the labor-force participation rate of prime-age men, ages 25 to 54, would fall to 88.2% by 2022, from the agency's baseline of 88.7% in 2012. But the participation rate of prime-age men has already fallen below the 2022 projected level, according to the most recent data, fluctuating at 66-year lows of 88% to 88.1% from May through July.

Given all of this, when the BLS updates its 10-year projections, it will probably lower its estimated figure for this all-important group.

Barron's is focusing on men ages 25 to 54 as a way to track the core rate of labor-force participation, because most have finished school and are too young to retire. For other demographic groups, there are cross-currents that make the overall trend hard to interpret, but that apply far less to prime-age men. As American Enterprise Institute senior fellow Charles Murray has bluntly observed, there was a time when "healthy men in the prime of life who did not work were scorned as bums." Murray goes on to note that the "norm has softened," but has not completely faded.

WHILE THE LABOR MARKET might not be restored to perfect health, it is certainly on the rebound. The jobless rate among prime-age males in July was down to 5.1%, with the overall rate at 6.2%. New unemployment-insurance claims from May through July hit lows not seen since May-July 2007. Job openings in the second quarter of this year, as tracked by the BLS, have risen to a monthly average of 4.6 million, a high not seen since second-quarter 2007.

All of this makes it hard to blame the continued decline of prime-age males in the job market on a lack of work opportunities, especially when their labor-force participation rate has already lost so much ground. From May through July of this year, the participation rate of prime-age males has been 88%-88.1%, down from 88.7%-88.4% in the same three months of 2013. At these 66-year lows, nearly one prime-age male out of eight -- an average of 7.3 million -- has opted out of the labor force in any given month.

The principal way to participate in the workforce is to hold a full- or part-time job. You also participate if you're unemployed. Contrary to a common misconception, in order to determine that you're out of work, the Bureau of Labor Statistics is not interested in whether you are receiving unemployment-insurance benefits.

To qualify as unemployed, you only have to tell the interviewer in the monthly BLS Household Survey that you conducted an active job search. The BLS criteria are lenient. If you say that over the past month you sent out one resume, filled out one job application, or made a single phone call to a friend or relative about a job lead, that counts as an active job search.

People ask if the plunge in participation by prime-age men is due to men joining the army or entering prison. No, because the BLS has anticipated that. For purposes of computing labor statistics, the relevant populations are defined by the agency as "civilian" and "noninstitutional" U.S. residents. In other words, they are not on active duty with the armed forces, and not confined to prisons or other institutions, such as mental facilities or old-age homes. In this case, the prime-age men remaining, currently 61.2 million, consist of the population eligible for civilian jobs.

As shown by the chart above, while their participation rate rose a bit in the 1950s, it was essentially flat from the late 1940s through the mid-1960s: 96.6% in 1948 and 96.6% in 1967.

The decline that began in the late 1960s is an anomaly that echoes the recent period, although it was far more extreme, since it coincided with some of the tightest labor markets ever recorded. By 1973, prime-age men's participation rate had fallen to 95%, even though joblessness among these men, at 2.5%, was still quite low.

WHAT CAUSED THE DECLINE, despite the tight labor market? Some analysts, impressed by the degree to which government programs can cause disincentives to work, point out that the drop coincided with the mid-1960s advent of the Great Society programs. Others respond by noting that the fall in labor-force participation by men in general began in the 1950s, well before these programs began. But to include all men when analyzing these trends is misleading, and highlights the importance of carefully separating age groups to help focus on the real trends.

The entire population of males includes men ages 16 to 24 and those 55 and older. In the 1950s, these two cohorts were marching to a very different drummer, just as they do today. The younger group was, in ever-increasing numbers, finishing high school and enrolling in college and graduate and professional programs, thus delaying their entry into the labor force. At the same time, members of the 55-plus group were taking advantage of America's growing affluence by retiring in ever-expanding numbers, accelerating their exit from the labor force. Restrict the numbers to men ages 25 to 54, and their labor-force participation remained intact from 1948 through 1967, before it began its long-term descent.

Might the surge in prime-age males opting out reflect the fact that the wages offered were often lower than those in the high-paid union jobs of the 1960s and 1970s? Perhaps, but if that discouraged men from seeking work, it would be an indication of an eroded work ethic. Notes Charles Murray: "Falling hourly income does not discourage work" when "men need to work to survive."

While prime-age men were fleeing the labor force, prime-age women were joining it, although at much lower rates than men. The participation rate of these women rose to a peak of 76.8% in 1999, from 35% in 1948. Since 1999, it has fallen back to 73.2%. Placed side-by-side, these trends could inspire the idea that men decided to work less because women were working more. Unfortunately, says New Hampshire–based consultant Peter Francese, the former president of American Demographics magazine, while the number of house-husbands has surely increased, there are no good estimates of how numerous they are.

In general, it is difficult to shine a light on people who leave the labor force, says Francese, because there are no systematic studies of their habits and practices. Are many of them working in the off-the-books underground economy that doesn't report to the tax collector? Probably, but as the Bureau of Labor Statistics makes clear, many of these workers might already be counted as part of the labor force. Some respondents who, for instance, paint houses off the books may prefer to tell the Household Survey interviewer that they don't work at all, while others might say they do have a job.

Do some of these people have independent means? If so, their number is small. Census Bureau data show that in 2012, just 232,000 prime-age men, or 0.4% of the total cohort, had income from stocks, bonds, and real estate of $50,000 or more, while 76,000 enjoyed an investment income of $100,000 or more. Both figures should be enough to get by without income from a job. But we don't know how many of these men supplemented that income with work.

And evidence exists that some of these men may be doing any of a combination of the following: living off loans and stipends that support them through college and professional school; using credit-card debt to cover living expenses; relying on spouses for support; working sporadically in the above-ground economy, or living off crime.

WHEN IT COMES TO the millions of people receiving Social Security disability income, however, it is fairly certain that virtually all of them are outside of the labor force.

The SSDI program "creates a very strong incentive against meaningfully participating in the formal labor market," says Massachusetts Institute of Technology economics professor David Autor, author of the November 2011 study, "The Unsustainable Rise of the Disability Rolls in the United States."

The reason is simple: If you take a job, you run the risk of being terminated from the program and losing the benefits.

Not that those benefits are especially generous. In 2013, the average payout per recipient was $1,146 per month. But recipients also get full Medicare coverage. According to Autor's calculations, the average value of that health-care benefit is the equivalent of purchasing a lifetime annuity for $275,000. When you bear in mind that SSDI income is steady and indexed to inflation, and that it's possible to supplement it with under-the-table money, it might not be surprising that the number of recipients has soared over the past few decades. The current cost of the system, according to Autor's calculation, exceeds $1,500 a year per U.S. household.

The surge in the number of recipients hasn't been driven by the aging of the population, argues Stanford University economics professor Mark Duggan, because the percentage receiving benefits has risen sharply within each age group. As the chart above, the share of SSDI going to men ages 25 to 54 has risen from 1.4% in 1970 to 3.3% in 2013.

This has occurred even though all other key factors indicate that the portion of workers on SSDI should have decreased, rather than increased. A smaller percentage of people are doing dangerous work, and the work that is dangerous is getting safer. In addition, the general population has gotten healthier. While those who used to file for disability typically had ailments such as cancer and heart trouble, today's filers more typically complain of mental disorders and back pain. The Social Security Website (ssa.gov) offers a "Disability Starter Kit" in both English and Spanish that walks you through the process of applying for SSDI, step-by-step.

"There is a very powerful kind of for-profit advocacy component to getting people onto SSDI," says Autor. Law firms that represent claimants are given a percentage of the take, much like personal-injury lawyers. That might seem reasonable, but the sums involved are large enough to create a special-interest group that has a stake in perpetuating the system. As Autor puts it, "The Social Security Administration each year pays more than $1 billion directly to attorneys that prevail against it on behalf of claimants."

Simple math gives us some idea of the program's effect on labor-force participation. As noted, 3.3% of prime-age men were in the program in 2013, up from 1.4% in 1970. If anything, the trends influencing health and safety might have brought a decline from that 1.4% share. But assume that it just would have held steady. The gap of 1.9 percentage points between 3.3% and 1.4% means that 1.2 million men would not be on SSDI if the 1970 rate remained the same today. And if those 1.2 million men were not on disability, they might be in the labor force.

We can do a similar exercise for ages 55 to 64. The share of men in this group on disability is currently 12.5%, up from 7.1% in 1970. If we apply the 5.4 percentage point difference, we find another million men who would not be on disability if the percentage hadn't climbed from the level 44 years ago.

As the chart also shows, SSDI enrollment among women has risen even faster, along with the increase in their labor-force participation. Since the share of women in the workforce was much lower in 1970, we might apply a 1990 baseline to the current figures. In 2013, 3.1% of prime-age women were on SSDI, up from 1% in 1990. Based on the 2.1 percentage-point rise, 1.3 million women would not be in the program if the 1% share still applied.

Similarly, among women ages 55 to 64, 10.5% were on SSDI in 2013, up from 4.6% in 1990 -- an increase that means 1.2 million women in this age group might be in the labor force if the 4.6% share had persisted.

Because these trends have recently flattened, they may not get worse. But one new factor that is just around the corner is the depressing effect on labor-force participation of the Affordable Care Act.

THE CONGRESSIONAL BUDGET OFFICE initially published an estimate of the ACA's labor-market effects in a report released in August 2010. But as a reflection of the CBO's integrity under Director Douglas Elmendorf, the agency stated in February of this year that the "earlier estimate had been too small."

In the CBO's release of February 2014, "Labor Market Effects of the Affordable Care Act: Updated Estimates," the figures are now much larger. This study projects that, as a result of the disincentive effects of the ACA, there will be a "decline in the number of full-time equivalent workers of about two million in 2017, rising to about 2.5 million in 2024."

According to the CBO, the "estimated reduction stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses' demand for labor, so it will appear almost entirely as a reduction in labor-force participation and in hours worked."

The disincentives work like this: By working more, people could lose subsidies bestowed by the ACA, amounting to an implicit tax on earnings, which could induce them to work less. For example, when a family's income rises above 400% of the federal poverty level, it will suffer a cut in subsidies equal to a marginal tax of 100% on the first few thousand dollars of extra income.

University of Chicago economics professor Casey Mulligan, whose studies of this subject are referenced in the Congressional Budget Office release, gives high marks to the agency for its openness in upwardly revising its estimates. But Mulligan, who is completing a book-length study that will initially be published as an e-book called Side Effects: The Economic Consequences of the Health Reform (see acaconsequences.com), is prepared to argue that, to be accurate, the CBO projections of two million in 2017 and 2.5 million by 2024 should be about doubled.

He points out that, contrary to the CBO's finding, there will indeed be a substantial net drop in businesses' demand for labor. For example, by 2016, a firm with fewer than 50 full-time employees will not be required to provide medical benefits. But a firm with 49 full-time employees will face a $40,000 penalty if it fails to provide medical insurance after adding a 50th employee. The huge marginal cost of that 50th worker will deter expansion.

Mulligan and the CBO make no judgment about whether the Affordable Care Act is worth implementing. As Mulligan remarks, "There is room to debate the net welfare effect of safety-net expansions, but the fact remains that they have a price." The price in terms of reduced participation in the labor force is not one to be taken lightly.

During periods of sluggish growth in the economy, politicians and pundits focus on the need to create jobs. But what is needed over the long run is an increase in jobholders to create a sustained pickup in economic growth. Indeed, without them, the chances of supporting aging baby boomers through their long years of retirement will diminish.

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